Palmerton And Bernburg Completions And Zinc Hedging Will Secure Stability

Key Takeaways

• Strong earnings growth expected in 2025 due to improved zinc hedging, lower charges, and higher recycled volumes.
  
• Project completions and cost reductions to enhance cash flow, profitability, and financial leverage.
  
• Befesa faces challenges including weak aluminum margins, plant maintenance stoppages, higher energy costs, geopolitical uncertainties, and unfavorable scrap metal dynamics impacting profitability.

Catalysts

Offers environmental recycling services to the steel and aluminum industries in European, Asian, and North American markets.

• The company expects strong double-digit earnings growth in 2025 driven by better zinc hedging levels, lower treatment charges, and higher recycled steel dust volumes, which will positively impact revenue and earnings.
  
• Ongoing projects such as the Palmerton refurbishment and the Bernburg expansion are expected to complete on time, leading to growth in cash flow and potentially higher future revenues.
  
• The zinc hedging program covers an all-time high level for Befesa, ensuring around €20 million of incremental EBITDA in 2025, providing stability and supporting earnings growth regardless of zinc price fluctuations.
  
• Efforts to reduce costs, particularly in the U.S. zinc refining operations, are expected to result in realized cost savings, improving net margins and overall profitability.
  
• The company is targeting a reduction in financial leverage below 2.5x by the end of 2025, which should decrease financing costs over time and support EPS growth through a more efficient capital structure.

Befesa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Befesa's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 7.3% in 3 years time.
• Analysts expect earnings to reach €105.4 million (and earnings per share of €2.64) by about May 2028, up from €50.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €122.8 million in earnings, and the most bearish expecting €88.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, down from 21.0x today. This future PE is lower than the current PE for the DE Commercial Services industry at 15.6x.
• Analysts expect the number of shares outstanding to decline by 2.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.13%, as per the Simply Wall St company report.

Befesa Future Earnings Per Share Growth

Risks

• The secondary aluminum segment continues to face challenges from a weak European automotive market, leading to compressed aluminum metal margins and affecting revenue and profit growth.
  
• Planned maintenance stoppages across Befesa's steel recycling plants have resulted in lower volume and plant utilization, which could negatively impact production output and revenue.
  
• The company's operations are affected by higher energy prices, primarily electricity and natural gas, which could result in increased operating expenses and squeezed net margins.
  
• Uncertainty regarding geopolitical tensions and trade tariffs could affect the zinc price, impacting revenue and earnings, especially given Befesa's reliance on zinc price hedges.
  
• The availability and pricing of aluminum scrap are impacted by lower industrial activity and increased scrap exports from Europe, potentially leading to lower margins and reduced profitability in the secondary aluminum business.

Valuation

• The analysts have a consensus price target of €33.1 for Befesa based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €45.0, and the most bearish reporting a price target of just €24.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.4 billion, earnings will come to €105.4 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of €26.7, the analyst price target of €33.1 is 19.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.